Fasano: “The whole reason why companies don’t stay in Connecticut is there’s no sustainability or predictability” [Courant]

November 19, 2015

Hartford Courant

With the crisis over General Electric’s possible exit from Connecticut exploding into national news, Gov. Dannel P. Malloy has quietly engineered a very large tax favor for the Fairfield-based company.

The favor — which Malloy still supports and is now trying to adjust — was buried in the 702-page tax “implementer” bill that lawmakers passed at the end of June with just a few hours to look it over before the fiscal year ended. It could be worth tens of millions of dollars; there is no official estimate because it gives tax benefits to GE for many years.

Now the question is whether it will help GE keep its headquarters in Connecticut. Malloy’s proposed changes, part of his bill to close this year’s budget gap, could make it even sweeter.

As currently written and signed into law, the measure gives special treatment to any company that had at least $6 billion in carried-forward losses by 2013 — most notably GE — by allowing such a company to use a higher percentage of those losses to offset taxes than other companies enjoy.

The measure came about in June, after GE issued an extraordinary public letter decrying proposed state business tax increases and threatening to find a new location for its headquarters by the end of 2015. There was zero public debate, and in fact, even Sen. Len Fasano, the Senate Republican leader, did not learn about it until weeks later.

GE will not discuss the tax or any other aspect of its decision-making. But Connecticut appears to be solidly in the running as the company considers where it will house its central office for the next generation.

On Tuesday night, GE CEO Jeffrey Immelt accepted an award from The Business Council of Fairfield County. He didn’t say what everyone wanted to hear — where GE’s headquarters search is leaning — but he talked at length about the need for an “ecosystem” that supports a software-based economy, according to Joseph McGee, the council’s vice president, and a report by the Stamford Advocate..

“The loss carryforward is a major issue,” McGee said Wednesday, “so I think addressing that is important.”

But McGee added, “GE’s move is not being driven by tax policy. It’s being driven by a major change in GE’s strategy…the GE spokesperson is not Ronald Reagan, it’s not Jeffrey Immelt. It’s a kid with a computer talking about going to work for GE and his friends being skeptical.”

Malloy, wanting that kid to land in Connecticut, told The Courant’s editorial board last week that he’s offering hefty incentives to the company — details he wouldn’t give, which include the carryforward tax measure.

On Monday, the Atlanta Business Chronicle, citing anonymous sources, reported that Georgia — thought to be a frontrunner — was out of the running. That story said the choice is down to New York, Boston and Connecticut.

Whatever happens with the headquarters, GE will continue to have a major presence in Connecticut. Immelt said so Tuesday night, and it’s clear from the facts. The headquarters has 800 of the 5,700 GE employees the company said were in the state earlier this year.

Since then, GE has sold or spun off GE Capital business units that employ many of those people, but the company will maintain finance jobs connected to its product lines, such as airplane leasing, and it still has a factory and office in Plainville.

The vast selloff and spinoff of GE Capital makes the loss-carryforward tax issue all the more crucial. Whatever GE has paid in state corporate taxes — sources say it’s generally very little compared with GE’s size — the company could have significant one-time profits as a result of the GE Capital moves.

That was part of the drama that unfolded in June, as GE, Aetna and other large employers made it clear the business tax increases were not okay.

“At some point somebody looked at the impact of that and on the basis of one of more entities in Connecticut, gulped,” said Kevin B. Sullivan, commissioner of the state Department of Revenue Services, being careful not to mention GE as a target of the measure.

The gulping was over a range of taxes that had passed the legislature: mandatory use of a method of calculating taxes known as unitary reporting; tighter limits on the use of tax credits such as those that companies earn for research and development; an increase in the tax on software development; and new limits on the use of carried forward losses.

Much was made of GE’s opposition to the unitary reporting measure, known incorrectly as a unitary tax (it’s not a tax). But all along, the issue has been the combination of the measures, along with the state’s pension liability crisis, which Malloy is also addressing — not to mention the overall climate for companies in the so-called “new economy,” where GE wants to be seen as a software bellwether.

The loss carryforward measure could well be the biggest-dollar item on the list. Losses in certain business units are amassed in many ways, including, in GE’s case, large investments in aircraft for leasing and writeoffs during the financial crisis. They can be used to offset taxes for 20 years.

Until this year, companies could use the losses to wipe out 100 percent of their state corporate profits tax. This year’s budget cut that to 50 percent, adding an estimated $156 million to state coffers in the current fiscal year.

The special measure says a company holding $6 billion in such losses can still use half of its loss carryforwards, at least $3 billion worth, to wipe out 100 percent of its state tax — starting in 2017.

A source familiar with the tax said at least two companies are eligible to benefit; several sources said GE is among them.

Measures such as this, which benefit a tiny number of companies, or perhaps a labor union or other constituent, are known at the Capitol as rats, because they are quietly hidden inside of legislation. As legal rodents go, this one is sizable.

What’s baffling here is why Malloy and his top aides chose to do this as a rat. It’s a good idea, and with GE threatening to move its headquarters to a tax-friendlier state, it would have had wide support.

“There just was so much going on and frankly, explaining the nuances of the corporate tax code is hard to do on little sleep,” said Ben Barnes, Malloy’s budget chief. As for proposing the measure openly, he said, “Maybe we should have…but it’s good policy.”

Many other tax giveaways to large companies are either widely debated, such as the $400 million United Technologies plan last year, or ballyhooed by Malloy with splashy events.

“We’re a company that…doesn’t look for special deals, but we need an ecosystem that’s forward-looking,” Immelt said in Stamford Tuesday, according to the Stamford Advocate. He may be right, but this measure is close to a special deal.

Fasano, the Senate GOP leader, makes the point that the change from 100 percent to 50 percent for the use of losses, adds to Connecticut’s reputation as an unpredictable place to do business.

“The whole reason why companies don’t stay in Connecticut is there’s no sustainability or predictability,” Fasano said. “We’re psycho, we don’t know what we’re giving and what we’re taking.”

That big issue is the subject of a lot of reform discussions — talks that led Malloy to drop the software tax increase, for example.
As for the rat, Fasano said he wanted the benefit to be available for GE right away — although he said GE executives did not seem very bothered by the delay to 2017 when he spoke with them after hearing about the measure.

Malloy is now proposing to eliminate the delay. That wasn’t offered initially in part because of fears GE would take the benefit and run. So now, the Malloy amendment says eligible companies could only use their losses to knock their tax liability down to $2.5 million a year.

An open debate in June, rushed as it would have been, might have ironed out that kink sooner. And it’s always nice for taxpayers, not to mention lawmakers, to know where the state’s money is going.